SINGAPORE (May 17): Credit Suisse has picked DBS Bank as its top buy, expecting it to benefit comparatively more from rising US rates than its peers while potential improvements in asset quality trends could provide further upside to earnings.
DBS also appears to have the most surplus capital, meaning there could be more upside surprise to dividends, says lead analyst Danny Goh in a Monday report which has outperform calls on both UOB and OCBC.
For the 1Q17 ended March, net profit for the three banks accounted for 25-27% of street’s full-year estimates on higher-than-expected NOII and lower provisions. Goh says the results could prompt the street to raise earnings estimates, in anticipation of better earnings in coming quarters on the back of an expected rise in NIM.
Meanwhile, asset quality fears are also subsiding. NPL ratios for all three banks were stable q-o-q for the first time since end 2015. While there remains some stress in the O&G sector, the banks find the situation more manageable. Credit cost for the banks was stable to lower q-o-q. New NPL formation for DBS and OCBC improved q-o-q and was stable for UOB.
“New NPL formation is now close to 70 bp of loans for all three banks and well below the peak of 1.5-1.8%,” says Goh.
Finally, there is the possibility of more dividend upside as capital accretion over 1Q17 affords DBS and UOB the flexibility of reviewing their dividend policy.
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“Management at both banks have alluded to the possibility of reviewing their dividend policy as the CET 1 ratios are now above their desired target levels,” says Goh, although OCBC's fully loaded CET 1 ratio declined to 12.2% as at end 1Q17.
Shares of DBS, OCBC and UOB are trading at $20.77, $10.40 and $23.10 respectively.
